Everyone is familiar with the tweets and threats which commenced after America’s tariffs on all imported washing machines and solar panels, imposed on January 2018 and, since then, have been escalated into a trade war mainly between USA and China; two of the three largest economies in the world. While (for now) a trade war between USA and Europe has been avoided the last minute with a bilateral deal, no-one is certain that such a war will not be expanded between more countries and affect the current global economic growth. At the time that the trade war between USA and China is taking place in the form of tariffs on billions of dollars of goods as well as fighting talks, the maritime community is watching all developments nervously, trying to evaluate their possible impact on shipping.
The current situation (as of July 2018) is pictured in the below timeline of BBC.
On March 2018 the USA imposed tariffs on imports of steel and aluminium (25% and 10% accordingly) except of those coming from Brazil, Argentina, Australia and South Korea. After failed negotiations with China, USA announced that will impose 25% tariffs on 50 billion worth Chinese imports, while a further threat for tariffs on 200bn worth of imports was announced during June. From the announced USA measures worth 50 billion, the first package of the 34 bn was put into effect on the 6th July and it includes tariffs mainly on electronics and machineries. The second package of 16 bn will enter into force in a future date and includes oil products, plastics and other commodities which are expected to affect more container shipping rather than the bulk. From its side, China responded to the initial US tariffs on April 2018 with tariffs on imports from USA worth 3 billion which refer mainly to food and beverages as well as steel and iron products. Furthermore, China took retaliation measures to the 50 billion tariffs of USA. From the 50 billion, the first part of 34 billiom entered into effect on 6th July. From these tariffs, the most important is the ones imposed on soybeans. Other than that, Canada and Mexico have also reacted by imposing retaliatory tariffs of 12.6 billion and 3 billion accordingly. At the same time a trade war with Europe has been avoided after a billateral agreement has been reached.
What history says?
An effort to specifically evaluate the situation based on historical events tends to be unsuccessful and this is because of three issues:
Each trade war is different with the previous and our recent history has not experienced a war of similar effect, where bulk/raw materials and the largest global economies are involved.
Freight market depends on various parameters, not all of which are affected by a trade war.
The current environment is still uncertain since the parties update their tariff lists and threats on a daily basis.
Though, historical events can give us a general picture, very useful to understand what we can expect from this and future trade wars.
The largest trade war of the 20th century occurred in 1930s with the Smoot–Hawley Tariff Act of USA which imposed import tariffs in more than 20,000 goods. The trade partners of USA responded with boycotts and increased tariffs for goods imported from USA with all this war lasting from 1930 until 1934. It is estimated that the world trade was dropped by about 26% between 1929 and 1932 while the dry bulk market experienced one of its longest and most painful depressions during the same period. However, since this trade war outburst simultaneously with the Wall Street Economic crash of 1929 (one of the worst crashes of the American history), while also the dry bulk market was suffering from over-supply, the effects of the trade war by itself cannot be exclusively verified. Though, the fact that the dry bulk market experienced a slight improvement between 1935 and 1937 (after the end of the Tariff Act and before newbuilding vessels touch the seas) shows that the trade war exacerbated the depression of the 1929 crash and negatively affected the shipping markets.
A more recent trade war occurred in 2002 when President of USA, George W. Bush, introduced tariffs on imports of steel products -excluding imports from Canada, Mexico, Israel and Jordan- and subsequently tit-for-tat retaliations followed by its trade partners. This trade war which lasted for about 2 years did not seem to have an adverse impact on the dry bulk market which experienced a high growth during the same period. This growth does not seem to be related with the trade war but with the high growth of the Chinese economy which, during the same period, boomed its imports on raw materials. This trade war had zero effect on the bulk shipping markets since the imports of steel products from countries affected by the tariffs was well below the 1% of the global dry bulk seaborne trade, while the retaliations were not related with bulk products. On the other hand, USA should have slightly increased its imports for raw materials as a result of the increased steel production while any (positive/negative) impact of the tariffs in the USA economy is disputed.
Another example is the very recent trade war of USA and Europe with Russia. In this case, USA & Europe introduced sanctions on various Russian entities, financial sanctions which can indirectly affect the country’s imports/exports and ban on their imports of Russian Oil. Russia responded with counter-sanctions mainly on agricultural products and equipments coming from Europe and USA. Despite the recession of the Russian economy and negative growth (for the first time after 2009), those sanctions seem not to have affected the world trade, since exports of Russian oil products have remained steady at about 2.80 million Bpd, Russian crude has experienced a growth of about 15% during the last 5 years mainly attributed to the increased supply due to earlier investments while grain exports increased with more than 20% due to the record production levels in the recent crop years.
Other trade wars do not seem to have a major effect on bulk shipping. The 1981 trade war between USA and Japan involved cars and finished products like motorcycles and electronics while the battle of the bananas which was lasted from 1993 until 2012 was only related with the import of bananas from Latin America into USA. On the other hand, various embargos of Europe and/or USA against countries like Iran, Sudan and Syria do not seem to have a direct major impact on world trade and bulk shipping, however there is surely an indirect impact since the growth in these countries is restricted and its trading activity is kept lower than it could be without those restrictions in place.
What current facts show?
The current trade war looks much different than any other. This is because:
It involves the two largest economies of the world, one of which (China) is also the largest importer of dry bulk commodities globally.
It involves two major trading partners both of which seem to take strong position against the other.
It includes various products; dry bulk, oils and containerized.
It is rapidly escalated while the relationship between USA and its other major trading partners looks fragile.
But what are the expected impact of the relevant measures? Let’s see the most important points:
(A)USA’s imports of steel and aluminium products traded in bulk is small: During 2017 USA imported about 23.20 million tons of steel and aluminium from countries affected by the tariffs which consist about 0.50% of the global dry bulk trade. This is relatively small and can either be replaced from the countries which are not yet subject to tariffs and/or the local production will be increased, in which case the need for raw materials will also be increased.
(B)Demand for soybeans is relatively non-elastic: Shipping of soybeans from USA to China is major trade with about 32 million tones during 2017. This is equivalent with about 22% of the global trade for soybeans but approximately 0.65% of the global dry bulk trade which is still a small effect. Not only this, but China’s needs for consuming soybeans will remain and either they will need to import from other nations (e.g. Brazil) or if possible to replace some quantity of soybeans with other grains. Not only that but in case of loading ex brazil, the distance is longer than loading ex USG and the ton-mile demand is increasing.
(C)Other products included in the current lists do not affect bulk shipping: Except of the steel and aluminium products, the soybeans and oil (which is included in future lists not yet came into force), other products are mainly transported in containers and do not affect dry bulk shipping.
(D)Retaliation measures taken from Mexico and Canada have limited influence on bulk trade: Most of the cargoes shipped from Mexico and Canada to USA are shipped by trucks or rails. Some steel products which may be shipped by dry bulkers represent less than 0.10% of the world trade and can not affect dry bulk markets.
(E)Bilateral Agreement between USA and Europe prevented the immediate escalation:
What should we expect in the future?
The future remains uncertain since the measures are still ongoing and the threats are exchanged between the parties on a daily basis. So, no one is really sure how the opposite parties will move and where this game will end. The increased tariffs do not necessarily negatively affect the bulk shipping since, in each case, we have to estimate how elastic demand is and what is the best replacement. In some cases, the increased ton-miles might have even a positive impact on bulk shipping. However, an escalation of the trade war between more countries and/or more products, even if on the short term it may have a neutral or positive effect on global trade, on the long term it can negatively affect the world economy as well as the economies of the countries involved, something which will definitely make their trade activity less prosperous and the shipping markets more vulnerable.
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